Intellectual Bankruptcy of Social Security Privatizers

Krugman explains the intellectual bankruptcy of the economics behind the most often heard case for privatization of social security. In Many Unhappy Returns Krugman shows that the economic assumptions required to generate the returns on stocks needed to earn the high returns predicted for private, personal, or whateveryoucallthem accounts require unrealistic assumptions.

And, alternately, if you believe our economy will have the kind of growth needed to earn the predicted returns, then there's no Social Security crisis anyway, because that amazing economic growth fill fund any possible future long-run shortfall.

Frankly, I see a greater intellectual defecit in taking one economist’s opinion as such gospel that all detractors are therefore “intellectually bankrupt.” Economics is no more exact a science than is law. Krugman is hardly without peers or superiors who disagree.

There are few absolute truths in economics, but certainly a few absolute lies:

1. There are free lunches. 2. “Hi, I’m from the government and I’m here to help you.”

Given the usual tenor of your blog, I am baffled by your quickness to accept economists who place their faith in government over individual choice.

Folk have missed an important new Social Security fact. Last week, the bipartisan Joint Committes on Taxation suggested loophole-closing changes in the Social Security taxes paid by members in LLCs and shareholders of S corporations. These technical changes are estimated to pick up $57 billion (without interest) over 10 years. Thus, loophole closing pushes the “crisis” out even further.

Your need for convincing examples of why one economist’s crystal ball may not be any clearer than another belies a fundamental misunderstanding of economic thought and analysis. Two economists, each relying upon different fundamental models, can come to completely different conclusions and simultaneously both be correct. Neither can call the other “intellectually bankrupt”, even after the predicted outcome comes to pass. One economist’s model might fail or succeed for reasons unrelated to the model’s underlying assumptions. Economists are not all that far removed from weathermen.

The debate about social security is a complex one. Reliance upon one economist who relies upon one school of economic thought is the truly intellectually deficient way to go about picking a side. When one does this, one is really only practicing selective listening, hearing only the side that comports with one’s world view. In a sense, one is doing exactly that what some have accused Bush of doing vis-a-vis information sources regarding chemical weapons in Iraq.

I’m sorry, but while that all sounds nice in the abstract and may well appply to some other debate, when applied to the issue in the Krugman column, one which is more actuarial than any question of models, what you are talking is basically nonsense.

If you were to actually read the column you purport to be criticizing, you would see it is not about the sort of thing that Keynsians disagree about with monetarists. It’s about simple arithmetic, and some complicated compounding. The point of the column is that the assumptions on which it are based are not in fact in dispute among economists or indeed anyone who can count.

Here, in case you missed it, is the key passage:

Which brings us to the privatizers’ Catch-22.

They can rescue their happy vision for stock returns by claiming that the Social Security actuaries are vastly underestimating future economic growth. But in that case, we don’t need to worry about Social Security’s future: if the economy grows fast enough to generate a rate of return that makes privatization work, it will also yield a bonanza of payroll tax revenue that will keep the current system sound for generations to come.

Alternatively, privatizers can unhappily admit that future stock returns will be much lower than they have been claiming. But without those high returns, the arithmetic of their schemes collapses.

It really is that stark: any growth projection that would permit the stock returns the privatizers need to make their schemes work would put Social Security solidly in the black.

Repeat: this isn’t about models but about arithmetic and logic: either the stock market goes up real fast, or it goes up real slow. If it goes up fast, we grow our way out of the problem. If it goes up slow, we have a social security shortfall about when I want to retire, and a bigger one when you want to retire, but the alternative of individual accounts does not help solve the problem.

It is still about models, all economic analysis is about models. In the model Krugman uses, he implicitly assumes that payroll tax revenue moves proportionately with economic growth (assumedly GDP or some other measure). The question of what that relationship is (correlation coeficient or some other measure) is absolutely a question of modeling. One theory could hold that economic growth may not necessarily raise payroll taxes to the extent he assumes for any number of reasons: technology, expansion of self-employed, imports, foreign outsourcing, etc.. I need not delve into the mechanics of a specific competing model (they’re out there), it is enough to say that credible economists may not buy his implicit assumption regarding this relationship, or may disagree with him as to its effects. Their models may show that indeed corporate equities have a closer correlation with economic growth, or atleast a different one. If you were to carefully examine competing models you might still be unpersuaded, but the fact that one side is more persuasive than the other doesn’t imply that the less persuasive side is “intellectually bankrupt.” To do so is analogous to concluding that a disstenting opinion in law is “intellectually bankrupt” simply because a majority of a court rejected it. You don’t teach students to think that way, do you?

Also, the issue must be addressed relative to opportunity costs. The true performance of a system that does not allow for privitization must be discounted by the difference of what privitization would have yielded. Some argue this would actually make the present system look even better, others that it looks worse or operates at an “economic loss.” So even if you can keep the present system afloat, unless you can show that it would outperform some of the privitization proposals, you still loose. You’ve addressed this in previous posts, although not directly, by bringing up issues like fees associated with equity trades and fund management. But that issue doesn’t win the day.

Again, economists are like weathermen. The farther out they are asked to predict something, the less likely anything they are saying will come to pass. That’s not to say we shouldn’t take them under advise, but to herald one particular guy (particularly one whose political neutrality is dubious) is not good policy. Again, that is the same behaviour that Bush was accused of vis-a-vis Iraq.